Southern Company (SO) is among the leading U.S. utility companies with significant regulated business exposure. The company has been going through difficult times in the recent past, as ongoing construction projects and cost overruns of projects remain an overhang. The company recently announced satisfactory financial results for 4Q2013, and provided earnings and capital spending outlook, which I believe will enhance investor confidence and portend well for the stock price. However, I believe ongoing construction projects are likely to stay an overhang on the stock price, until they are completed. Therefore, I reiterate my 'hold' recommendation on the stock.
Financial Performance and ongoing projects
The company recently reported healthy financial results for 4Q2013 and FY2013. Results for the recent fourth quarter were positively affected by an economic recovery and favorable weather conditions. The company registered an EPS of $0.47, beating consensus estimates of $0.46, up 6.9% from the corresponding period last year. Operating revenues for 4Q2013 also increased to $3.93 billion, up from $3.7 billion in 4Q2012. Operating revenues for the full year, 2013, also increased by 3% year-on-year. Earnings per share for the recent fourth quarter were positively affected by better weather conditions to $0.03, lower income tax $0.02, better retail sales $0.01 and other items $0.02, partially offset by higher non-fuel O&M and depreciation, which negatively affected earnings by $0.02 and $0.01, respectively.
In the recent fourth quarter, the company took another after-tax charge of $25 million in relation to cost overrun for Kemper County Project. The Kemper project's total estimated cost has increased to $4.06 billion. The company, in recent quarters, has been consistently registering a charge due to cost overruns, which has remained a risk and concern. The Kemper project is expected to be in service by 4Q2014. The company completed its off-take pipeline in 2013; also, approximately 75% of the gasifier piping has been installed and tested. The management is expecting to test the gasifier in 2Q2014. The following table shows the increase in estimated construction cost for Kemper County Projects.
Source: Quarterly Reports
Another of SO's ongoing construction projects is Vogtle Nuclear Construction Project, which has experienced an increase of approximately $750 million in its estimated cost and has a generational capacity of 2,200MW. The Unit 3 and Unit 4 of Plant Vogtle are expected to be operational by 4Q2017 and 4Q2018, respectively. The uncertainty attached to the estimated construction costs of both the ongoing projects will remain an overhang on the stock price until they are completed.
Capital Spending and Earnings Guidance
The company provided its capital spending and earnings guidance for the next three years, which I believe will provide clarity and boost investor confidence, which will portend well for the stock price. The company plans to spend $15.9 billion in capital spending from 2014 through 2016. The planned capital spending is expected to fuel its bottom line growth through rate case increases. The following chart shows the projected capital spending outlook for SO for the next three years.
(click to enlarge)
Source: Investors Presentation
The capital spending is expected to slow moving beyond 2015, as the ongoing projects will be reaching their completions. Due to the slowing capital spending trend, earnings growth for the company is expected to slow down from 4%-5% in 2014 to 3%-4% for 2015 and 2016.
The company also provided its earnings forecast and expected dividend increases for the next three years. As the future payout ratio is expected to stay high in upcoming years, I do not foresee a ramp in dividend growth. Currently, the stock offers a high dividend yield of 4.9%, which makes it an attractive investment option for dividend-seeking investors. The following table shows the expected earnings, dividends and payout ratios.
Implied payout Ratio
Source: Investors Presentation
The company reported healthy financial results for 4Q2013 and full year 2013. Also, the capital spending and earnings guidance will provide clarity into the future and portend well for the stock price. Also, the dividends offered by the company are safe, as they are backed by its solid regulatory earnings base. However, the ongoing construction projects are expected to remain an overhang on the stock price, and keep SO's price multiples under pressure. Therefore, I recommend investors to keep a check on the estimated costs of ongoing projects and reiterate my 'hold' position on the stock.